How can historical trends in election years determine whether you alter your portfolio?
It’s natural to question the impact a presidential election may have on your investment portfolio. Should you implement certain investment strategies? Should you just sit tight? Should you consider any historical trends?
These questions can have merit, and historical trends can be one of the factors that determine whether you want to alter your investment portfolio, says Alan McKnight, Executive Vice President and Chief Investment Officer for Regions Asset Management in Birmingham, Alabama
Certain stock market trends occur in presidential election years, regardless of which party ultimately wins the White House, McKnight says. “The key determinant is going to be less about politics and more about economics,” he says.
“From our perspective, the best investment strategy to adopt during a presidential election year is to look at the overall economic climate. For example, is gross domestic product growth slowing in the U.S. and globally?” he says.
What Does History Say?
You might look at the presidential cycle by year to get a sense of how the stock market has reacted in the past. The first and eighth years in a presidential term have historically experienced lower stock market performance. “That may not bode well for 2017,” McKnight says.
In the first year of a president’s term since 1948, the U.S. has experienced four recessions (five if you include Kennedy who entered the office mid-recession). That compares to one in the second year, zero in the third year, and three in the fourth year of a presidential term.
It also matters whether one party controls both the presidency and Congress. Divided government — where one party controls Congress and the other party controls the presidency — typically makes legislating more difficult, meaning less uncertainty for investors and more consistency across the markets. “Investors want consistency,” McKnight says.
“[Looking into 2017,] our overall recommendation for investors is one of conservatism,” McKnight says. “There may be more volatility in the months to come, so it’s important to have an investment plan and strategy that matches your risk tolerance to your short- and long-term goals. Pay little attention to the noise created by Brexit and the rhetoric coming from politicians. Stay focused on your plan.”
Learn more about asset allocation and diversification.
